INFICON Holding (VTX:IFCN) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that INFICON Holding AG (VTX:IFCN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for INFICON Holding

What Is INFICON Holding's Net Debt?

As you can see below, at the end of December 2020, INFICON Holding had US$19.2m of debt, up from US$7.33m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$60.1m in cash, so it actually has US$40.9m net cash.

How Healthy Is INFICON Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that INFICON Holding had liabilities of US$69.2m due within 12 months and liabilities of US$13.1m due beyond that. Offsetting these obligations, it had cash of US$60.1m as well as receivables valued at US$63.6m due within 12 months. So it actually has US$41.4m more liquid assets than total liabilities.

This state of affairs indicates that INFICON Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.67b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that INFICON Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, INFICON Holding saw its EBIT drop by 4.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if INFICON Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. INFICON Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, INFICON Holding's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that INFICON Holding has net cash of US$40.9m, as well as more liquid assets than liabilities. So we are not troubled with INFICON Holding's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in INFICON Holding, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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